A role of the financial management
Financial Management is an interesting subject to learn, a lot of news about growth, takeovers and corporate restructuring. To understand all about this issue, we have to know about financial management and financial markets. In general, many companies face the same problems, for example, a company engaged in the manufacture of kitchen appliances need the equipments to process raw materials into finished goods in the form of kitchen appliances. The company has to build a factory to store equipments and raw materials. They also need workers to perform the process of making and selling the products. When the production process takes place, firms must have a supply of raw materials, works in process and finished goods. The company also needs funds to conduct activities. Companies must pay employees without having to wait for the proceeds in cash. The company also has to keep accounts receivable, when the company grows bigger the more funds will be needed to support the activities.
The example of recent situation is a real picture of the problems faced by the company, financing problems and some decisions should be taken by a financing manager of the corporate.
Central tasks and responsibilities of a financial manager
As a financial manager, he or she must be able to deal with
• Selection of products and markets for the company.
• Selection of strategies that will be used to conduct research, investment, production techniques, sales and promotions.
• Selection, training and motivation on employee.
• Efforts to raise funds with low cost and efficient ways.
• A series of adjustment measures on the business environment and level of competition.
Because of the tasks to be performed by a financial manager, he or she should do with
1. Financial analysis of the result related with the decisions which made.
2. Do any analysis on funding needs to be achieved and the potensial sales volume by the company.
3. Do some efforts to raise for funds in accordance with the level of demand needed by the company.
4. Do any analysis on balance sheets and income statements, finding the way of cost control and ideas in making price decision of products or services sold.
5. Do any analysis on cash flow statements to determine the sources and uses of funds.
Generally the financial functions are making investment decisions, financing decisions and dividend distribution to investors for the use of their funds. Funds have been collected either from internal or external companies used to support all business activities should be able to generate an attractive return or exchange of yield. This is a real thing and a very common way in the organization of business firms, government and nonprofit organizations.
The things that should be achieved by a financial manager as the main objective of their works
- Do plans to acquire and the use of funds to maximize the value of the organization.
- Everything which be done must focus on investment and financing decisions or relate with it. Generally the successful companies have many experiences about the ways to increase sales of products or services and to raise funds from investors.
- Do any collaboration with other managers so the company can operate more efficiently. For example, each marketing decisions will impact to sales, investment needs, the availability of funds, inventory policies and the use of production capacity.
- Do something to connect companies with the money market and capital market, where firms obtain funds and trade securities.
The functions and duties of financial managers directly deal with the major company's decisions and they effect on value of the firms. As a Financial Director or Chief Financial Officer (CFO), he or she has a high level position within the organizational structure of the company and an important role on each decision which he made. CFO interacts with senior officials and other functional fields in the organization, he or she must be able to deliver and communicate to all divisions about the financial implications concerned with the decisions which he made. CFO also takes responsible for all activities of the treasurer and controller which performed.
The differences of duties and responsibilities by a treasurer and a controller.
According to the finance function within the organization, there are differences of duties and responsibilities between a treasurer and a controller
- A treasurer is a person who has responsibles for the acquisition and the use of funds. A treasurer shall maintain a relationship between the company with the bank and having jobs with managing credit, insurance funds and pension funds.
- A controller or accounting or administration is a person who has responsibles for accounting issues, financial statement reporting and control, procurement and cash management including daily cash flow position reporting and the position of working capital, cash budgeting and cash flow statement as cash reserves.
A controller or accounting has to keep records on company's financial statements including budget preparation, payroll, tax and internal audit.
Some companies use the company secretary not only to attend and record on every topic of top management’s meeting but also to manage each listing of shares and bonds owned by the company. In this case the companies secretaries are required to understand on various rules about stocks issues and bonds.
For financial managers who are proved active and have the ability in setting direction and policy of the company and able to pass through various levels of difficulty due to decisions that made by the top management level, likely toward the top position in the company as its CEO.
There is also some companies that use financial committee consist of people with different various of backgrounds and abilities to formulate policies and preparing decisions for the company relate with financing issues. This finance committee is determining whether a company will use finance resources from within or outside the company for its operations. During this determining process, the finance committee concern with the economic conditions such as interest rates and industry factors such as the impact of changes in commodity prices and the trend of stock price due to market perceptions on current business situations and conditions and market expectations of the future corporate performance.
A very simple failure managing indicator of a corporate with its financial management is presented by the company's stock price which is likely to decline. In the
, financial management goal is to
maximize the value of company’s stock while having a conflict of interest
between the owners of the company with the provider of the fund as a creditor.
In Japan, financial management objectives are not only maximizing the value of
company’s shares, but also try to capture the largest market share for the enterprise
products because with the largest market share the company will be able to keep
with the long-term profitability. In Europe, the goal of financial management have
some kind of combination with increasing on social welfare instead of just as
in the United
States United States and .
For example, a company whose activities are using 50% common stock and 50% bond loans with a rate of 10%. When the company gets earnings, all bondholders will enjoy the results of 10% but somehow if the company gets greater success, the value of its common stocks issued by the company will obtain a tremendous increasing but the value of bonds still remain unaffected. Conversely, if the company is getting financial difficulties that cause irritate on the repayment of debt, all bondholders will get precedence right while the value of the company's stock will decline.
Based on the example, the value of common stocks become an indicator to measure the level of success of a company in conducting on its activity. A company that perform better than other companies would enjoy a higher increasing in its stock value and more convenience in obtaining of new funds when needed.
The objective of maximizing the value of stocks does not mean to sacrifice the interests of bondholders by diverting the initial activity to become an investment activity that contains more risk. If a company succeeds in investing, the shareholders will enjoy a huge of advantages but the result does not bring any impact to the bondholders. Conversely, if such investment with a higher risk is fail then the interests of the bondholders would be threatened even the bondholders as creditors have a priority right to obtain a return on funds. Therefore, as a guarantee that companies will not and must not alter the initial of company’s activitiy arbitrarily, the company is required to pay a higher interest rate to bondholders as a compensation for the changes of policies that negatively impact to the investors.
Maximizing the value of stocks or to maximize the value has a broader meaning than just maximizing on profits.
· Maximizing the value means to consider the influence of time on value for money. Funds which received today is more valuable than which is received someday in the future.
· Maximizing the value also means to consider the risks of revenue streams. The rate of return on securities issued by some government-owned companies have a lower risk of default than the rate of return on securities issued by private-owned companies.
Improvement of social welfare is a social responsibility which are included in the financial management objectives.
To maximize the value of company's stocks requires a capable management performance to run the business very well however to maximize the corporate’s value can be done through the creation of the new products which are more efficient and innovative through the use of many kinds of new technologies and bring the better impact on increasing volume of employment. Companies that have successfully in maximizing on the value of the company are able to produce good quality and useful products in large quantities.
Social responsibility can be manifested by the company through the efforts which can bring more healthy environment by reducing on pollution to a minimum state. All the waste should be processed into a harmless condition. A corporate social responsibility is not only going with a waste problem but also have to produce the products that are safe for daily consumption. The safety work environment of the plant with a zero level in accidents is a part of corporate social responsibility objectives. Similarly, the company policies and the impact of corporate activities and the efforts to enhance the welfare of the community around the business location are part of a social responsibility which have to be achieved by financial management.
Profitability and risk factors.
Profitability and risk are the most influence factors upon the value of the company. The most important thing that should be decided by financial management concerned with the corporate profitability and risk is choosing on which industries should be run by the company. Second, to select on large or small scale of business activities that will be run by the company. Third, which rate of growth that the company should obtain. Fourth, which machines are needed and how many machines should be provided to support all of the activities. Last, the financial management should decide about how much debt will be used to maintain on company's liquidity and business activities.
A cash position can be used to reduce the level of risk faced by the company but the excess supply of cash that does not give the results could potentially disrupt the company's profitability.
Increasing in debt will impact on rate of return and the risk for the company although it gives more profitability for shareholders' capital. To overcome this problem, the financial manager should be able to find a balance point or the trade-off between the level of risk with the level of the most optimal return on capital for shareholders.
In addition of considering the risk and return, other things that influence on financial management is the increasing of the rate of inflation nor a hyper inflation state. That kind of inflation brings some influential impact on financial.
a) The problems that occur in accounting as a result of an increasing in the rate of inflation nor a hyper inflation state
Increasing the rate of inflation affects the reporting of earnings listed in the income statements. An increasing in profits that are listed in the income statement as a result of the increasing value of sales revenue due to inflation while the value of inventories is still using the numbers before the occurrence of inflation. The cash flow is decreasing to the lower condition, especially when companies have to make some purchasings again with an expensive price to replenish inventories.
Besides the increasing in profits due to an inflation, the calculation of depreciation costs which had been made is useless because the amount of depreciation can not be used to carry any equipments and replace with a newer machine nor equipments, because the cost of equipments and the price of machines has increased due to inflation. As a result, reported earnings in the income statement become more higher because the value of inventories and depreciation costs are low because they are using the values before the inflation occur.
Consequently of reporting on high profit in the income statement, the payment of income tax which made by the company becomes higher and the company’s cash flow is decreasing. If the company plans to pay dividends and do some purchasings for any machines during the inflation time, then it will bring more severe condition on financial.
b) The problems that occur in planning as a result of an increasing in the rate of inflation nor a hyper inflation state
Each business activity is preceded by a long-term planning. For example, to set up a factory always precedes with an analysis of costs and benefits projection for the activity which to be selected. The age of business activity, economic conditions and levels of competition will be considered along with the analysis process. In such conditions where an increasing in the rate of inflation nor a hyper inflation state is happening, a plan that has been made is difficult to be implemented because the price of raw materials and wages is increasing very rapidly.
c) The problems that occur in demand for capital as a result of an increasing in the rate of inflation nor a hyper inflation state
An inflation will cause increase to a demand for the capital needed to run its business activity in a given volume and time period. A purchasing activity to replenish inventory that has sold out or used up will cost more expensive due to the rising prices of goods. Every expenditure needs to perform maintenance and repairs on tools and production machinery is also increasing due to the rising prices of equipments, spare parts and wages. While financial managers are looking for any additional capital as needed, the government tried to control the rate of inflation by limiting the funds circulating in the community through some restrictions rules for all lending activities. Because the funds which circulate in the community is less and less while the number of requests for funds or the demand for capital is increasing, so the lending rates is increasing too.
d) The problems towards the interest rates as a result of an increasing in the rate of inflation nor a hyper inflation state
The interest rate listed on each securities paper is an actual interest rate which used for the normal economic conditions, not available for the economic condition with a hyper inflation state.
The prevailing interest rate in the money market is the nominal interest rate, which consists of the actual interest rate plus the inflation index or the inflation premium. Inflation index or the inflation premium is a long-term inflation rate expected by the government for a certain period of time. Due to an increase in the rate of inflation results in high costs to obtain funds for the government, businesses and individuals.
e) The problems towards the interest rates of bonds as a result of an increasing in the rate of inflation nor a hyper inflation state
If the interest rates is increasing because of an increasing in the rate of inflation, then the prices of long-term bonds will decline. To overcome the losses due to impairment of the capital, then the lender will make some changes to the interest rate of bonds. Normally, interest rates of bonds are fixed rates, due to an increase in the rate of inflation, the interest rates of bonds will follow to the volatile movement of interest rates or follow the movement of bonds indexes.
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